What's A Cash-Out Refinancing Loan?

Cash-Out Refinancing means refinancing your house for more than you owe, so you get a pack of cash.

Here's an excellent analysis of cash-out refinancing from bankrate.com:

Homeowners today treat their houses like piggy banks, readily transforming their equity into cash and credit. You have home equity loans (still sometimes called second mortgages), home equity lines of credit and reverse mortgages. Then there's cash-out refinancing.

With cash-out refinancing, you refinance your mortgage for more than you currently owe, then pocket the difference.

Here's an example: Let's say you still owe $80,000 on a $150,000 house, and you want a lower interest rate. You also want $20,000 cash, maybe to spend on your child's first semester at Princeton. You can refinance the mortgage for $100,000. Ideally, you get a better rate on the $80,000 that you owe on the house and you get a check for $20,000 to spend as you wish.

Cash-out refinancing differs from a home equity loan in several ways:

• A home equity loan is a separate loan on top of your first mortgage.
• A cash-out refinance is a replacement of your first mortgage.
• The interest rates on a cash-out refinancing are usually, but not always, lower than the interest rate on a home equity loan.
• You pay closing costs when you refinance your mortgage.
• Generally, you don't pay closing costs for a home equity loan.
• Closing costs can amount to hundreds or thousands of dollars.

It doesn't make sense to refinance a higher amount at a higher rate. If your current mortgage is at a lower interest rate than you could get now by refinancing, it's probably better to get a home equity loan. Or, if you're 20 years into a 30-year mortgage, you're paying more principal than interest with each mortgage payment, says Nancy Flint-Budde, independent Certified Financial Planner in Salem, N.Y. "If you are that far into a loan, then it might not make sense to refinance, even if your current rate is slightly higher."

There's not much cash-out refinancing these days or any kind of refinancing.

Banks are scared and raising standards along with interest rates.

NEW YORK (CNNMoney.com) — The percentage of homeowners who refinanced with a Freddie Mac-owned loan in the first quarter of 2008 and received mortgages with loan amounts higher than their original mortgages, fell to the lowest levels since early 2004.

New figures show that 56% of homeowners with Freddie Mac (FRE, Fortune 500) owned loans received more than $29 billion in home equity through refinancing in the quarter. This represents the smallest cash-out refinancing percentage since the second quarter of 2004. In the fourth quarter of 2007 77% of refinances involved cash out.

Because credit has become more difficult to get, the quality of borrowers qualifying for cash-out refinance loans has significantly increased, said Mark Zandi, chief economist for Moody's Economy.com.

"Lenders are only refinancing those with 50% equity or more," he said. "There are a lot of home owners out there who don't have any debt besides their mortgage."

Zandi said many of these prime borrowers decided to refinance as interest rates have sharply declined. Freddie Mac expects 30-year fixed mortgage rates to average between 5.8% and 6.0% for prime loans over 2008.